Discuss Advantages and Disadvantages of Inflation Targeting, with Special References to the Case of the Uk.
Discuss advantages and disadvantages of inflation targeting, with special references to the case of the UK.
1.0 Introduction: Prosperity, success and economic growth are largely perceived as created by free markets and private enterprise. However the need for government policy to promote economic growth as well as stability cannot be overlooked. Monetary policy has emerged as one of the most crucial government responsibilities this is due to a number of reasons. Firstly there is now a general agreement that low, stable inflation is important for growth and that ‘monetary policy is the most direct determinant of inflation’. Secondly monetary policy has ‘proven to be the most flexible instrument for achieving medium term stabilisation objectives’. The use of monetary policy by central banks meant inflation has been lower in most countries and aside from the current economic downturn, recessions have largely been absent. Since good economic performance today does not guarantee good economic performance in the future central banks develop strategies that provide not just good economic performance today but also stability and growth in the future. One of those strategies is inflation targeting. [1] 1.1 Definition: The definition of inflation targeting is in itself part controversial. I will consider a few definitions given by the ECB, Ben Bernanke et al. and Mervyn King. The ECB defines inflation targeting as “a monetary policy strategy aimed at maintaining price stability by focusing on deviations in published inflation forecasts from an announced inflation target”.[2] Bernanke et al.’s (1999) definition of inflation targeting, “Inflation targeting is a framework for monetary policy characterised by the public announcement of official quantitative targets for the inflation rate over one or more time horizons.” He also states that ‘inflation targeting serves as a framework for monetary policy and not as a rule’. This is because treating inflation
1.0 Introduction: Prosperity, success and economic growth are largely perceived as created by free markets and private enterprise. However the need for government policy to promote economic growth as well as stability cannot be overlooked. Monetary policy has emerged as one of the most crucial government responsibilities this is due to a number of reasons. Firstly there is now a general agreement that low, stable inflation is important for growth and that ‘monetary policy is the most direct determinant of inflation’. Secondly monetary policy has ‘proven to be the most flexible instrument for achieving medium term stabilisation objectives’. The use of monetary policy by central banks meant inflation has been lower in most countries and aside from the current economic downturn, recessions have largely been absent. Since good economic performance today does not guarantee good economic performance in the future central banks develop strategies that provide not just good economic performance today but also stability and growth in the future. One of those strategies is inflation targeting. [1] 1.1 Definition: The definition of inflation targeting is in itself part controversial. I will consider a few definitions given by the ECB, Ben Bernanke et al. and Mervyn King. The ECB defines inflation targeting as “a monetary policy strategy aimed at maintaining price stability by focusing on deviations in published inflation forecasts from an announced inflation target”.[2] Bernanke et al.’s (1999) definition of inflation targeting, “Inflation targeting is a framework for monetary policy characterised by the public announcement of official quantitative targets for the inflation rate over one or more time horizons.” He also states that ‘inflation targeting serves as a framework for monetary policy and not as a rule’. This is because treating inflation